Squeezed HMOs Asking Employers for 20 Percent Premium Hikes

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If you haven’t yet negotiated rate renewals on your insured health maintenance organization plans, you may be in for an unpleasant surprise.

Employers who have already dipped their toes in the water have, in fact, gotten the bad news: In a time of low inflation, HMO premiums are heading straight up—and rising faster than expected.

In the current benefit-renewal season, HMO premium increases of 20 percent are typical, and some employers have been socked with hikes of more than 50 percent, according to an advisory notice that benefits consulting firm William M. Mercer sent to clients.

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That compares to a hike of 11 percent in total health care benefits costs for this year predicted by over 3,300 employers responding last September to a Mercer/Foster Higgins survey of benefit plans, according to the advisory.

To date, Mercer has received at least 477 renewal-price quotes from insured HMOs, representing $350 million in premiums, according to Tony Kotin, a principal and health care consultant in Mercer’s Chicago office.

A big reason HMOs are asking for such huge hikes is that, for their part, they’re being squeezed by hospitals and doctors, Kotin tells CFO.com.

Having gobbled up smaller hospitals or forced them out of business, large hospital systems now tend to dominate a geographical area, putting them in a strong position to charge HMOs higher prices for their services, he says. Doctors have also strengthened their negotiating position by forming group practices, he notes.

HMOs’ “leverage to negotiate has diminished within the past decade,” Kotin adds.

As that was happening, the ability of HMOs to skim the cream out of the risk-bearing population has declined, according to the consultant.

In the 1980s, he explains, HMOs attracted young, healthy workers, a situation that decreased the plans’ claim costs. But now those workers are 15 to 20 years older, and their need for care has grown accordingly.

Further, despite a popular belief that workers tend to leave HMOs for indemnity plans as they age, those that entered in the plans two decades ago have gotten used to them and are largely choosing to stay in HMOs, Kotin says.

After a decade of cost-cutting measures, HMOs have also run out of their ability to pick “low- hanging fruit,” according to the consultant.

Managed care organizations had “significant success” in cutting the fat from “what was a very inefficient and poorly managed system,” he says. While in the mid-1980s, 400 bed-days per 1,000 hospital stays was typical, now that figure is more likely to be 200, according to Kotin.

Having cut hospital usage 50 percent, many HMOs “can’t do much more” in the way of health care cost management, he adds. Thus, they’re seeking the premium hikes from employers.